How Microlenders Helped Quickly in Haiti

Hollywood couldn't have done it better. Late in the afternoon on Jan. 22, an armored car packed with $2 million in cash rolled out of J.P. Morgan Chase headquarters in downtown Miami, headed to the Homestead Air Force Base. Thirty-four bricks of bank notes packed into ordinary office supply boxes were loaded onto a C-17 transport plane redeployed from Langley, Va., and dispatched to Haiti, lighting up switchboards at the United Nations, the U.S. State Department, the Federal Reserve, and military rescue bases in Port-au-Prince.

Before dawn the next day, the stash was on a helicopter bound for 34 branches of microlender Fonkoze. While Port-au-Prince's nine commercial banks were in a shambles and Western Union was paralyzed, half of Fonkoze's 42 agencies were up and running in four days, and all but two of the rest within a week. The amounts were trifling: no more than a few dollars per client. But for tens of thousands of desperate Haitians, the nimble infusion of cash amid the chaos and ruin literally meant survival. For the legions of aid bureaucrats, charities, civic groups, and emergency organizations struggling to get a grip on the Western hemisphere's worst natural disaster in memory, Fonkoze's nationwide client base of 200,000 depositors (50,000 of whom are also borrowers) was a ready-made lifeline. Could microcredit be the new Red Cross?

This is not exactly what the loan angels had in mind. Since at least 2006, when Muhammad Yunus won the Nobel Peace Prize for his pioneering work in extending credit to the poor, microfinance has been in the spotlight. The founder of the Grameen Bank, a Bangladesh-based credit outfit, Yunus believed in the transformative power of advancing as little as $10, $20, $30 at a time to people that commercial banks wouldn't allow through the door. Now, experts reckon there are 75 million microborrowers worldwide who hold $39 billion in loans, and enthusiasts speak of billions of the poor waiting to parlay pennies into enterprises and kickstart development in the most blighted countries.

Such ambitions have drawn flak: "I am unaware of any historical examples of nations that climbed out of poverty on the backs of small entrepreneurs financed by credit," U.S. circuit court justice and economic historian Richard A. Posner once commented. But microcredit initiatives have since bloomed in a thousand boardrooms, winning converts in the World Bank and the Inter-American Development Bank (IDB), and even luring major commercial banks, many of which now see the future of their industry in courting the "unbanked" multitudes.

But the Haitian earthquake illustrates a more pressing role for microfinance institutions: helping societies respond to shattering tragedies. Ironically, not so long ago many development experts assumed it was the microfinance institutions (MFIs) that would need saving in times of crisis. National calamity, they noted, falls hardest on the weak, depriving the poor of jobs and capital and so, they reasoned, automatically driving them into massive default. "If people could get no money, they couldn't repay. The whole sector was threatened," says Don Terry, a former IDB microfinance and remittances specialist.

In fact, the opposite has been the case. "Devastation typically paralyzes the big banks," says Terry. "Microfinance institutions are used to dealing at grassroots levels in a way that large commercial lenders cannot." In 1998, when Hurricane Mitch ravaged Nicaragua and Honduras, shuttering banks and destroying roads and bridges, microlender Fundación León 2000 stepped into the breach, putting its experience and vast rural customer network at the service of relief agencies. "Microfinance institutions were the only ones able to communicate," says Alberto Solano, the Grameen Foundation's regional CEO for the Americas.

MFIs swung into action again after the Asian tsunami in late 2004. Even as they buried the 200,000 dead and cared for the injured, rescue crews were faced with tens of thousands left homeless and desolate across Indonesia, India, Sri Lanka, and Thailand. For that, they needed not just cash but an organization structured to parse the needs at ground level and get money to scattered clients. Enter microcredit experts like Grameen, which helped raise disaster loans and channel the credit to stricken families through local microlenders.

Haiti has been the acid test. When serial hurricanes battered the country in 2008, drowning whole towns, killing nearly 800, and wiping out jobs and savings across the island, credit services were threatened with extinction. Instead of buckling, Fonkoze expanded. The bank managed cash-for-work payments during the clean-up, rescheduled outstanding loans, waived interest payments, and reached out to new clients. A year later, more than eight out of 10 of the bank's clients had repaid their loans. This experience proved critical when the earthquake struck. With Port-au-Prince in ruins, Haiti's banking sector went dark for nine days, choking off the vital flow of remittances ($1.87 billion a year) that Haitians receive from relatives abroad. Though badly shaken itself, Fonkoze, the island's largest microfinancier, kept working (from a borrowed van, in one instance), giving families access to cash for immediate needs as they waited for emergency rations of food, water, clothes, and medicine.

Microfinance is not likely to replace emergency rescue efforts, where immediate humanitarian assistance is crucial. "Giving grants might send the wrong message about microfinance, encouraging people not to pay back their loans," says Grameen's Solano. Others argue that microfinance could play a much wider role in first response to disasters. Because they tend to the poor, microlenders move in and out of dangerous areas, such as crime-ridden slums, where button-down lenders do not or will not go. Their vast client base also "creates a network that can locate people as the population migrates out of the destroyed capital and help distribute food, water, and tents," says Fonkoze's director, Anne Hastings. "If the technology were in place, [we] could transmit SMS messages and locate displaced people or evacuees and reunite families."

To the founders, microfinance means much more than donning rescue gear and mopping up after tragedies, manmade or not. But when calamity strikes, and the world's poorest people are in the way, no mission would seem more appropriate.

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